VALUATION

Property valuation or land valuation is the practice of developing an opinion of the value of real property, usually its Market
Value. ... So, Market value must be free from forced value or sentimental value. It is the estimated amount for which
a property should exchange on the date of valuation.
What is VALUATION
Valuation can be defined as:
“The art of expressing opinions in a mathematical form in order to arrive at the value of a particular interest in a particular piece
of property at a given moment of time” (Millington 2000).
• The determination of the economic value of an asset or liability.
• A valuation is estimation or subjective assessment of the value of an interest in a property to the holder of the interest.
Based on the valuer’s knowledge of market conditions and transactions.
• A valuation is a prediction of price before it is achieved.
It is said that the property market is an imperfect market or inefficient for the following reasons
- data on transactions is often difficult to obtain;
- property is a heterogeneous product;
- Illiquid product
1 Valuation and price are different. A valuation can be inaccurately calculated whereas price is determined in the market
by supply and demand.

Why do properties need to be valued

The reason for the valuation will determine the method to be applied to carry it out. A valuation does not necessarily lead to a
transaction (sale or purchase) that can support or contradict the valuation, thus the value of the property is not exact and is often
adjusted according to the purpose for which it is used.
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Valuation is concerned with the value of an interest held in property. There can be several interests in one property at the same
time and each of these is capable of being valued. The interest being valued should always be stated clearly in a valuation
report.
• Mortgage
• Sale
• Purchase
• Rent
• Company reports
• Probate
• Calculation of rates obligations or other public levies
• Calculation of tax liabilities, e.g. inheritance
Legal interests held in a property Freehold Leasehold Charge against the property in the form of a mortgage Easements
2 Covenants.
Factors to be taken into account when carrying out a valuation
• What are people currently spending their money on
• What are the current trends
• What changes in investment policy are taking place
• What is being done with money Why are these things happening
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Valuation Bases
• Worth and Investment Value The value of property to a particular owner, investor, or class of investors for identified
investment or operational objectives.
• Fair Value The amount for which an asset could be exchanged, between knowledgeable, willing parties in an arms length
transaction.
Methods of Valuation
• Site value is derived Value & Cost from taking costs from Gross development value
• Residual Value as basis of profit of going concern Profits Cost of construction & Cost site value combined
• Re-instatement Capitalisation of income Value flow to find capital value. Investment Comparative Value of property Value.

Factors affecting value of property

• Macro economic environment
• Demographics

3 • Planning control
• Government policies
• Infrastructure availability
• Building costs
• Location
• Microeconomic factors
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PRINCIPLES OF VALUATION DEFINITION OF COST, PRICE AND VALUE
Cost : It is the expenditure to produce a commodity having a value. In our construction Industry cost means the original cost of
the construction including the cost of materials and labour. Hence the cost is a FACT.
Price : It is the cost of a Commodity plus additional reward to the producer for his labour and Capital. In our construction
industry the original cost of construction with certain percentage of profit. The profit or additional reward may be varied from
Builder to Builder, and Business to Business because the Price is a POLICY.
Value: Valuation is an opinion or an estimate which will be determined by many factors like the purpose, supply, demand,
depreciation, obsolescence etc. Valuation is a function of place, date and purpose.

DIFFERENT KINDS OF PROPERTIES

 Land and Building
 Agricultural lands
 Coffee, Tea, Rubber plantations.
 Forest
4  Mines and Quarries
 Stocks, Shares, Debentures
 Plant & Machinery
 Jewellery
 Works of Arts & Craft
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PURPOSE OF VALUATION
 Purchasing for Investment
 Purchasing for self Occupation
 Revision of Capitals
 Interim Reports of Execution of Buildings or other structures.
 Compensation for land Acquisition
 Present Value of Old Properties
 Arbitration
 Assessing property Tax
 Income Tax, Wealth Tax
 Gift Tax, Capital Gains
 Selling
 Mortgaging
 Collateral Security
5  Auctioning
 Insurance
 Court fee stamp
 Partitions
 Stamp Duty
 Rent Fixation. etc., etc.
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All the above purpose of valuation has been divided into six major categories as below:
1. Taxation
a) Income Tax There was no Income Tax on Capital Gains Tax liability on business enterprise consequent to revaluation of
assets.
b) Wealth Tax Now, wealth Tax is payable by all the assessee except Coop. Societies, social club, political parties, specified
mutual fund and non profit objective institution. To avoid excess payment of wealth tax and/or recovery it is desirable to get
valuation done of agricultural land and farm houses as well as vacant land and surplus land with specific regulations
governing those properties.
c) Gift Tax To avoid wrong computation of gifts made it is desirable to have a valuers report. It would help to avoid payment of
excess tax, penalties and prosecution. This is very important whenever movable/immovable properties are transferred to
relatives and it is likely to attract provision of deemed gift. As part of tax planning. Whenever a will is made life interest are
created in it, it is desirable to take advantage of valuers report more particularly so whenever assets are inherited.
d) Capital Gain Tax shall be on a different principal and as such a valuers report as on 1st April 1981 has become
absolutely essential for properties purchased or inherited prior to 1981.
e) Partnership dissolution. As such any dissolving partnership firm should go in for a valuers report on the day of
dissolution and valuation should be done preferably by a registered valuer empanelled with Income Tax Department.
6 f) Rent vis-à-vis depreciation Depreciation is not available on the cost of land and as such as a part of tax planning
normally land is purchased by one assessee and is given on rent to another assessee. There is always a difference
of opinion as to how much rent is to be paid and as such it is desirable to have an expert valuers report on rent to be
paid to substantiate your claim.
g) Seizure of Jewellery To avoid seizure of jewellery at the time of income tax raids, it is desirable to have separate
valuation for separate jewellery for each family member. It is mandatory to have valuation done form a government
approved valuer, if market value of jewellery exceeds Rupees five lacs.
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h) “Reassessment in Income Tax Law”. A residential house was purchased and along with the return of income tax a valuers
report was enclosed. After some time during investigation in other case it was felt that reassessment is necessary because
probable agreement value was not the fair market value, however, in the above referred case reassessment was unjustified.
i) Transfer of Property If you are buying or selling immovable property, exceeding Rs. 10 lacs together with plant, machinery,
furniture,fixtures or other things including rights therein like membership of Co-op Society etc. etc. in any of the cities viz. Delhi,
Mumbai, Calcutta, Chennai, Banglore, Lucknow, Amhedabad. Then it is obligatory to the transferor and transferee to obtain
permission under section 269 of Income Tax Department.It is desirable to substantiate your claim, of correct price with the help
of valuers report who is an expert in doing necessary valuation.
2. Finance
a) Purchase, sale, take over, merger Whenever you are purchasing or selling or going in for amalgamation or taking over of
a company you may need financial assistance from the bank or otherwise also to avoid addition of unexplained
investment it is desirable to justify the transaction by obtaining on exhaustive, detailed valuers report.
b) Term loan or Cash Credit facility Books of account are reflecting invariably historic depreciated value of machinery and
plant, however, which are free from encumbrances, similarly book value of landed properties also appear to be historic
because of inflationary trends which are also free from mortgage can be better utilised to avail either term loan and/or
cash credit facilities to make company financially healthy.
7 c) Bank Guarantee Industrialist, business man, contractor, individual are required on many occasion to offer bank guarantee
for different purpose and as such it is desirable to revalue the assets and incorporate them in the books of account to
reflect high net worth of the company person soliciting bank guarantee. Revalued assets can be offered as co-lateral
security to financial institution for offering bank guarantee.
d) Window dressing International accounting standard expects to reflect true value of assets in the books of account as a
fair business practice which would help share holders of company, vendors of company, bankers of company to know
soundness of company and as such revaluation of assets at a regular interval of three to five years is strongly
recommended.
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e) Devaluation of rupee Now that we are approaching free economy and rupee is partially convertible till the time market are
settled and our finance position improves effect of devaluation of rupee cannot be ignored more particularly so wherever
imported machines were procured prior to devaluation and are installed and where technology has not become obsolete it is
desirable to get these machines revalued and bring it to the books of account.
f) New issues An existing company when intending to go in for expansion and is desirous to go in for public to raise capital, it
would be in fitness of the thing to revalue assets prior to launching new issue, thereby increasing intrinsic value of shares. In
fact this would help in fixation of higher premium amount charged by promoters attempting to bring public issue.
g) Advance against works contract In some tenders floated by government departments, public undertaking, advance is given
to contractor as he is expected to deploy some machinery for execution of said works. For claiming such advance a valuer
report is solicited. In fact machinery deployed need not be new, advance is also given against deployment of old machinery,
however, quantum of advance may be different for procurement of new machinery and deployment of old machines.
h) Incentives While shifting an industry to backward area or no industry zone certain percentage of old machinery is allowed to
be shifted without loss of incentives, however, agency who are offering these incentives have incorporated a condition that
value of such machines should not exceed permissible percentage of total capital employed in the industry. In order to
substantiate our incentive claim, it is desirable to support it by valuers report. i) Security deposit for Electric Company
Due to inflation, cost of input for generation of electricity and the increase in government duty and cost of overhead, ultimately
increases electricity charges. All electric supply companies are taking security deposit approximately equivalent to three months
8 consumption. Impact of this deposit is very much felt by heavy power consumers like foundaries, heavy engineering industry,
continuous process industry etc., etc.
3. Industrialist
a) Foreign Collaboration If one is making an attempt to have foreign collaboration. As part of pre-planning/ preparation it is
desirable that assets are revalued and incorporated in the books of account to give better impression of the company.
b) Custom Duty If a second hand machine is imported the invoice value is disputed by custom authority as they are interested
in getting proper revenue for Government. To claim the correctness of invoice value it would be beneficial to have a valuer
report
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c) Octroi
Local self governments are levying octroi on goods brought into their area. Percentage of octroi to be
levied is incorporated in the rules, however, this levy is based on invoice value and this invoice value is
always disputed with a view to increase revenue for local self government.
d) Auction
In advance countries share holders are very vigilant and as such limited companies going in for disposal
of capital good and its scrap or residual commodities are auctioned only after soliciting valuer written
opinion. With the advent of free economy in our country it is high time that all the public limited companies
also fall in line with it.
e) Vacating Premises
Some time it is necessary to delay vacation of premises and such occasion means squaring account of
vendor and retrenchment of employee and in all probability closure and winding of unit. Valuers have
come to rescue to delay the eviction.
g) S.S.I. registration
Small scale industries are granted necessary registration based on capital employed in fixed assets.
9 S.S.I. registered units have certain advantages from various authorities and as such it is very important to
have S.S.I. registration to S.S.I. unit. Valuers opinion is attached as a document to justify that capital
employed does not exceed permissible limit.
h) Where there is no bill
Sometime machine are fabricated/tailor made to suit to the requirement of an industry. In fact only direct
labour cost of fabrication and material is incorporated. Cost of technical know how and probable profit if it
is purchased from outside with various duties is not included in capital assets, it is desirable to do
valuation of such machine to incorporate them in the books of account.
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i) Adequate and timely insurance
General Insurance business Nationalisation Act 1972 was incorporated making all insurance company as government
undertaking with effect from 13th May 1971.Prior to nationalisation underwriting of insurance was done only after assessing
insurable interest, commonly referred as sum insured i.e., insures liability, however, after nationalisation sum insured
responsibility is vested with the insurer. Insured comes to know of this said fact only when claim is made and it is determined as
sub standard, either for over valued or under valued and as such it is absolutely must that exhaustive detailed report is
forwarded along with proposal form to insurance company to protect desired insurance interest of the insured. Advanced
countries are following the system stated above.
4) STATUTE
a) Stamp duty
Under TamilNadu Stamp Duty Act document becomes valid only if necessary stamp is affixed to document prior to its signature
and as per Transfer of Property Act, document so executed it to be registered with sub-registrar. Government of TamilNadu and
other state governments has given directive and has fixed price of land by adopting Book of Rates as to how much should be
the value for stamp purpose which invariably is the highest amount and not real transaction value and as such to substantiate
one’s claim one is expected to submit valuers report to avoid excess payment of stamp duty.
b) Land Acquisition Act 1984
Government acquire land for public utility and pay compensation as per Land Acquisition Act 1984. Even after incorporation of
necessary amendments compensation paid to an unwilling seller is very low and invariably litigation takes places. Provisions of
10 said Act are so absurd that it does not discriminate large scale acquisition of land and a small property acquired. Now valuation,
is a complex field and has an impact ofeconomy, legal and technical, etc. etc. and as such role of a valuer has become
inevitable.
c) Official Liquidator
Official Liquidator solicits values report with a view to understand that if company is in liquidation willingly or unwillingly, if
thrown open to market for auction what price it would fetch.

.
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5) Personal Planning
a) Charity Commissioner and Registrar of Co-op. Societies Whenever a charity trust or Co-op Society is buying or
selling any capital goods, equipment, factory and/or property one is required to solicit permission in advance and
for that purpose valuation report is also solicited.
b) Personal Planning through will If property is to be transfered to a particular person, interest of life is created
through will to avoid legal problems at a later date which is invariably supported with valuers report.
c) Visas To establish the fact that you have sufficient stake in the country, it is desirable to substantiate your claim
by providing an evidence of fair market value of you assets instead of book value.
d) Perks of Senior manager or directors of the company are provided with furnished flat including various gadgets
with a view to give him an indirect benefit, however, these items cannot be given as it is to the retiring person
and as such a proper valuation reports is obtained for debiting net value of these facilities from the amount
payable to the retiring person.
e) Housing Loan While procuring loans for housing, valuation report is necessary.
f) Family partition Property of joint family when subject to partition valuers opinion is obtain to facilitate smoother division.
His views are of importance if multi storeyed building is to be offered at a realistic value to members of family.
g) Divorce Settlement In typical case of divorce if a property is good and sufficient it is invariably valued before divorce
11 settlement is made.
6) Social Responsibilities
It is time now, when a member of parliament may take services of expert valuers team to know actual investment
incurred on Road Works. Tube wells/ Irrigation / Housing / Public Sector undertaking etc. etc. within a very short
period and raise question in parliament budget session to the concerning minister and play important role in future
development of the country.
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KINDS OF VALUES AND DEFINITIONS
Market Value: It is defined as the sum the property will fetch if it is sold in the open market.
Guideline Value : It is the value of the land which is recorded in the Register of Registrar’s Office and used for the purpose of
determining the Stamp Duty at the time of Registration of the Documents.
Book Value: It shows the original investment of a Company on its assets, including properties and machinery less depreciation
for the period passed.
Salvage Value: Value of Machinery realised on sales when its useful span of life is over but still it has not become useless.
Scrap Value: It is also called as Junk Value or Breakup Value of Demolition Value. It will represent the value of old materials in
a building less cost of demolition.
Disposal Value: It is defined as the Value that can be realised if the assets were to be removed from the foundation and sold
as separate stand alone items.
Insurance Value: It is the value of the Building for which the building is insured. Normally the Building is insured for the
superstructure alone (not for the foundation).
Earning Value: It is the present value of a property which will start yielding an income in future.
12
Potential Value: It is an inherent value which may go on increasing due to passage of time or some other factor which will
fetch more return.
Distress Value: If a property is sold at a lower price than that which can be obtained for it in an open Market, it is
said to have “Distress Value”. It may be due to:-* Financial crisis for the Vendor* Panic due to War, Riots Earthquake,
Floods, etc.,* Land Locked Land* Sentimental reasons* Nuisance.
Speculative Value: When the property is purchased so as to sell the same at a profit after some duration, the price
paid is known as Speculative Value.
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Monopoly Value: In a developed Colony, the value of the plot goes on increasing when number of the available plotsgoes on
decreasing. The fancy price demanded by the Vendor for the remaining plots is known as Monopoly Value.
Sentimental Value: The extra price which is demanded by a Vendor when he attaches certain sentiments to his property is
known as Sentimental Value having no relation with the Market Value.
Fancy Value: It is also called as Desired Value. If the Purchaser wants to have a property somehow since the procurement is an
absolute necessity for him due to various reasons, he is prepared to pay more sum when compared with others. He attaches a
special desire over the said property. The extra sum he is prepared to pay is called Fancy Value.
Accommodation Value: Small strips or lands cannot be developed independently due to their restricted lengths, depths etc and
number of purchasers for this property is less. These strips could be sold only to the adjacent land owners who may be offering
only a low value. This is called Accommodation Value.
Replacement Value: Replacement Value is the cost of reproduction of a similar Building with similar specifications at the current
Market Price on the date of Valuation. It is also called as Reproduction Value or Reinstatement Value.
Depreciation Value: It is the reduction of Value of the Property due to age, deterioration, lack of maintenance, obsolescence,
decay, wear and tear etc., Depreciation Value depends upon the age and its future life.
It is the gradual decrease of usefulness or value of a property. This could be due to
• wear and tear
•Structural deterioation
•Decay
13
•Obsoleteness
It can be calculated as below:
Straight line method: A fixed sum is allocated as depreciation every year –
Annual Depreciation = ( Original Cost – Salvage Value) / Expected life in years.
Present Value: It is replacement value less depreciation value.
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GENERAL PROCEDURE TO DO THE VALUATION OF BUILDING
1. Measure the Plinth Area. Observe the specification and other factors which affect the value.
2. Adopt suitable Replacement Rate of construction (for the Building portion alone) depending upon the existing conditions
and specifications.
3. Multiply the plinth area by the unit rate to get the replacement value of the building.
4. Ascertain the age of the Building.
5. Estimate suitable total life of the Building.
6. . Assume suitable % age for salvage value. Calculate Depreciation by Straight line method. Depn % = (Age / Total life) x
(100 - % Salvage value). If the age is not known or if the building has crossed its service life, estimate future life and calculate
the depreciation by using the formula. D = Total life Total life  Future life x (100 - % age salvage value)
7. Depreciation % age multiplied by the Replacement value will be the Depreciation Value.
8. Present Value = Replacement Value – Depn. Value This is the value of Building.
9. Add suitable depreciated value for other works like Amenities, extra works, miscellaneous works etc.

14 10. Add suitable value separately for services depending upon the actual’s specifications.
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II) Constant Percentage Method : Where the depreciation for any year
is taken as a constant percentage of the present cost ( the value at the beginning of the year)
Sinking Fund - On expiry of the utility period , a property is either to be replaced or reconstructed or rebuilt.
The fund set aside for this purpose is known as sinking fund. It is created by regular and periodic payments which accumulated at
compound interest will form the amount for such a replacement or reconstruction at the end of the utility period of the asset/property.
The annual installment for the sinking fund may be derived as:
I = Si / (I + i) n – 1

S = Amount of sinking fund

I = Rate of Interest in decimal (3% as 0.03)

n = Number of years required to create the sinking fund

I = Annual installment required.

o) Rent - It is a certain periodical profit in money, provision or labour issuing out of land and tenements.
It is a stipulated sum paid by a tenant for the temporary use and possession of the property.
It must include :1. Ground rent; 2. Interest on Capital expended in buildings; 3. Allowance for profits; 4. Sinking fund and
15
5. A sum for enterprise and risk.
p) Ground Rent - Rent paid for the use of land for the purpose and privilege of building on another man’s land. There are two types:
1. Secured – Gives security to the ground rent. Such a rent is thus rent from land secured by buildings. It is something more than
a land value and the lessor may obtain possession of the whole property.
2. Unsecured – when the land is let out without any stipulation that the lessee shall erect a building on the land , there would not
be any additional value to revert to the lessor at the termination of the lease. Very little security to the owner with little
appreciation.
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q) Rack Rent - Maximum possible annual rent of the land and building.
When the rent is a reasonable return on the investment on land and building the rent is known as standard rent.
r) Year’s of Purchase (Y.P.) - It is the multiplier of net returns to obtain the capitalised value of property.
Capitalised value = Net annual Income x years of purchase if the income from the property is to continue reasonably for a
long period.
Y.P = 100 / Rate of Interest
In case the income is likely to continue for a certain number of years only, the Y.P is reduced in such a way that the income from
property will provide not only the interest on Capital but also a sinking fund to replace the Capital.
Here Y.P = 100 / (rate of interest + allowance for sinking fund)
METHODS OF VALUATION
A. Valuation of Land
Five methods are adopted:
1. Comparative Method – Value of any plot is assessed based on the sales similarly situated properties in comparable areas.
i) Registration

16 ii) Judgements in Courts

iii) Awards by land acquisition officers are valid records of sales for comparison purpose.
• Cautious enquiries are required to be carried out to ascertain the value registered is the real market value, for land transactions
between private properties.
• The sales have to be studied with reference to the
i) shape
ii) factors relevant to land development e.g Services, Accessibility, proximity to existing facilities
iii) date of transaction
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Valuation of Land Comparative method(contd.)
• Based on the above an opinion regarding the value of the land is arrived at.
• In this method of valuation, it is always the value of the vacant lots that is considered, without any structure or
encroachments etc.
• If there is no vacant land to which the comparison can be made, an analysis of land with the building can be made,
where the correct value of the building should be deducted from the total price to arrive at the value of land.
2. Assertive Method - Used when no information is available for comparison. These are:
i) A nearby property in rental is considered and the net annual rent is capitalised by multiplying by a suitable years of
purchase.
ii) The current value of the building ( cost of construction) less depreciation.
iii) The current value of the building is deducted from the capitalised value of the property to get the land value.
3. Investment Method - Specially used for valuing agricultrual land and green lands.
• Following methods are followed:
i) Estimate the gross annual income accured from cultivation or fruit bearing trees.
17 ii) Deduct the expenses like Cost of cultivation, Manuring, Harvesting,
Irrigation etc. from the gross income to obtain the net annual income.
iii) Capitalise the net income, considering it as an annuity by multyplying with suitable year of pruchase.
iv) Compute the value of firewood for non fruit bearing trees and add to iii)
v) If the agricultural land is located near a town having potential for development as a building site, allow a potential value
considering the trends of development.
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4. Belt Method- A major factor influencing the land value specially for urban land is the road frontage. A wider plot along the road
fetches higher value.
However, it is not an accepted method in land acquisition practice.
This method is mostly used for deeper plots with less road frontage.
• Following steps are followed:
i) The plot is divided into two or three belts. The depth of the first belt is adjusted suitably ( say 10.0 m. in commercial area)
ii) The unit value of the first belt of the land is decided by comparison method. The unit value of the second belt (50% more
than the first belt) is kept at 75% of the land value of the first belt and unit value of the land in the third belt (50% more than
the second belt) is kept at 50% of the unit value of the first belt.
iii) The total value so computed is adjusted considering the shape o0f the land and the recessed nature of the rear belts.

5. Hypothetical Development Method – Used for open tract of land near urban areas.
• Methods are:
18 i) Assume a hypothetical development scheme e.g housing colony
ii) Compute the probable cost of development for roads, services etc. and suitable subdivisions into plots.
iii) Estimate the probable value of the developed plot considering the time period for development and find out its present
value.
iv) Deduct the cost of development and estimate the present value of the plot.
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Valuation of Land with buildings – following methods are used.
i) Valuation based on cost - (or Engineer’s method)
Here the value of the property is taken as the value of land and cost of building. When the building in a plot making the
best use of site. Cost of building is as in the actual estimate, depreciation of the building for the lapsed life is allowed for.
It is used for valuing property with a slightly old building. The valuation is not a real index of the value of the property. The
value is to be computed based on the reconstruction on the date of valuation rather than the original cost.
ii) Rental Method of Valuation - When the land is fully developed by building at the property is let at a fair rent and the rent is
likely to be maintained for years to come then the rental method is applied. In this method the result is the value of land
and building taken together and cannot be apportioned.
• The method of valuation is as follows:
Value = (Gross Annual Rent – all outgoings) x Y. P
Gross rent is taken for the purpose of valuations must be the fair rent, prevailing and capable of being maintained for long
time in that area.
The outgoings /deliverables are:
19 i) Municipal Taxes – varies 5% to 16% of the annual rent

ii) Repairs and Maintenance of the premises – 1% to 5% of the actual cost of the building or 10% of the gross rent.

iii) Collection charges and management: 2% to 5% of the gross rent

iv) Vacancies and bad debts – based on actual data for the past 3 to 5 years.

v) Insurance – 1% to 3% of the gross rent

vi) Sinking fund – the sinking fund are usually invested at 35 to 4% interest

The Y.P used for capitalising the net rental will vary depending on the type of occupancy. This is computed from the average returns expected from the property.
 VALUATION
3.Residual Development Method - In this method the probable increase in the net income from the property (if certain additions, alterations and
modifications are carried out) is worked out. The cost of such repairs are estimated.
The difference between the increased capital value and the estimated cost of modifications is taken as the potential value of the property.
4. Comparison Method – When the rental value is not available, but there are evidences of sale price of properties as a whole. In such cases the
capitalised value of the property is fixed by direct comparison with sale value of similar property in the locality.
5. Valuation based on Profit – In certain cases e.g Hotels, Public places, Cinema houses etc the value primarily depends on the profits resulting from
the volume of trade or business.
In such cases an estimate is made of the gross profit from this profit (by deducting outgoings of the trade.)
The Net Profit is treated as the net income and multiplied by Y.P. to obtain the value of the property. Known as Accounts Method. It may invariably
be checked by any other method of valuation.
6. Valuation of Lease Hold Properties – The rental method of valuation can be effectively used for valuing lease hold properties.
• i) A lessee pays ground rent to the owner and erects a building for renting out.. The rack rent collected by the lessee from the tenants
includes:
a) Ground rent
b) The interest on his investments
c) Outgoings including sinking fund for the redemption of capital by the end of this period and the enterprisers profit.
• Ii) A lessee may take on lease a completed building to be rented out to a third parties.In either case it is necessary to know the rack
20 rent of the property and the standard rent or the actual rent.
• If the lesseer’s interest is being valued, the ground rent during the lease period has to be capitalised generally at 4% to 5% Interest
and the reversionary value of the property at the termination of the lease period to be added. In the latter case the capitalisation
should be the net rent received by the lesser.
• If the lessee’s interest is being valued the net rental collected by the lessee is to be capitalised. In this case the capitalisation should
be of the profit rent which can be ascertained by deducting the standard rent (actual rent) from the rack rent.
• Where a land includes encumbrances compensation has to be paid to the dominant owners for the extinguishment of easement.
For a land having easement, this amount has to be allowed while valuing the property.